Commercial vs. Residential Property Taxes Under Prop 13

There are some MAJOR misconceptions about the effect of Proposition 13 on commercial property taxes. Below are some revealing facts, exposing several liberal canards in this area. And these facts are provided by the California State Legislative Analyst’s Office — an unimpeachable source.

But first, some background:

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Perhaps the most important proposition on the November ballot will be the Left’s strongest attempt yet to gut Prop 13. They will employ a “divide and conquer” strategy. Prop 13 has withstood attacks because of an uneasy alliance between the business and homeowner constituencies. If the progressives can break this alliance, Prop 13 will go down in flames.

The first phase is to get everyone mad at evil businesses (aren’t ALL businesses evil?). The Big Government advocates will dwell on a couple unfair strategies used to avoid commercial property reassessment — a strategy that is used in a tiny fraction of commercial real estate transactions. But rather that fix this “loophole,” the November proposition will reassess ALL commercial properties at current values — in the hopes of raising an additional $9 BILLION annually — primarily to help pay for the grossly underfunded pensions and retiree health care for public employees — and to avoid the need for pension reform.

If that works — if homeowners abandon their business allies in November — then the NEXT phase (the FINAL phase) will largely remove Prop 13 protections for homeowners. Without the financial backing of the business community, the homeowners (vilified as primarily the SENIOR white homeowners) will lose in this very blue state.

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So it’s important that people become familiar with why this attack on businesses is based on false premises. The 2016 article below was put out by the Legislative Analyst’s Office, a slightly left of center source that generally is reliable in fiscal matters. Especially so when their conclusions are at odds with accepted anti-Prop 13 doctrine. Here are the three salient “takeaway” points from the Prop 13 study (the part of the study regarding commercial property):

1. Contrary to the left wing mantra, residential property owners are NOT paying a larger percentage of the property taxes since Prop 13 was passed.

2. Contrary to liberal dogma, California commercial and residential property turns over (is reassessed) at roughly the same rate.

3. Contrary to progressive propaganda, there is no significant evidence that Prop 13, which gives veteran businesses a property tax break, has resulted in less new business creation.

Below is the link to the full study. I’ve included here just the part about the effects of Prop 13 on commercial property taxes.

Homeowners pay a slightly larger share of property taxes today than they did when Proposition 13 passed. Proposition 13 does not appear to have caused this increase.

Some Shift in the Share of Property Taxes Paid by Homeowners. In 1979–80, homeowners paid about 34 percent of property taxes (on secured property). This share fell to a low of 32 percent in the mid–1980s. Since then, however, the share has risen. In 2015–16, homeowners paid about 37 percent of all property taxes. In part, this may be due to faster growth in the number of residential properties than the number of commercial and industrial properties. Since the passage of Proposition 13, residential properties overall (not just owner–occupied homes) grew by almost 60 percent, while commercial and industrial properties grew less than 30 percent. Because the number of residential properties increased faster than commercial and industrial properties, the share of property taxes paid by residential properties increased as well.

Proposition13 Does Not Appear to Be a Major Cause for This Shift. As described in the background, under Proposition 13 owning a property for more years results in a lower property tax bill compared to those purchasing a similar property more recently. Thus, if some types of properties turn over more frequently than others, the share of property taxes paid by those properties would increase. In particular, if residential properties turn over more frequently than commercial and industrial properties, then Proposition 13 would be part of the reason homeowners pay a slightly higher share of property taxes today. This does not appear to be the case. Rather, residential, commercial, and industrial properties appear to be turning over at relatively similar rates.

Residential Properties Do Not Turn Over More Often Statewide. As seen in Figure 8, the rate of turnover for residential (including homeowners and rented residential properties) and commercial and industrial properties across the state is relatively similar in recent years. Though the rates of turnover are not the same in each year, residential properties do not appear to turn over at rates much higher than commercial and industrial properties statewide.

Residential Properties Are Not Reassessed More Frequently Than Commercial and Industrial Properties. As discussed in the background, when a property is sold, the county reassesses the property. Comparing the frequency of reassessment across property types in Los Angeles County, shown in Figure 9, suggests that residential properties are not reassessed—and therefore do not turn over—more frequently than commercial and industrial properties. In addition, in San Diego County a typical commercial and industrial property was last reassessed ten years ago, compared to 14 years ago for residential property. This suggests residential properties turnover slightly less often, which increases the tax benefits to these properties. Because residential properties do not appear to change owners more frequently than commercial and industrial properties, Proposition 13 likely did not cause the slight increase in the share of property taxes paid by homeowners.

Does Proposition 13 Discourage New Business Creation?

New businesses that need to purchase property often face higher property tax costs than existing competitors. There is little evidence, however, that this significantly discourages creation of new businesses.

New Commercial Property Owners Pay Higher Taxes Than Existing Owners . . . Property tax payments for similar properties differ based on when the properties were purchased, with properties purchased more recently paying higher property taxes. This is true of all property types, including commercial properties used by businesses. For example, in Los Angeles County in 2015, a typical new commercial property owner paid $2.69 per square foot in property taxes, compared to $1.18 for commercial property owned ten years or longer. This difference becomes more stark when looking at commercial properties owned for 20 years or longer, which typically pay $0.87 per square foot.

. . . But It Is Not Clear That This Significantly Deters Creation of New Businesses. Higher property tax costs for new commercial property owners seemingly creates a disadvantage for new businesses that need to buy property. This may make it harder for new businesses to compete with long–tenured, existing businesses. Arguably, this could slow new business creation in areas with many long–tenured businesses. However, data on business creation in three large counties across the state (Los Angeles, Sacramento, and San Mateo) lends little support for this claim. Figure 10 shows new business filings (registration of new business entities with the Secretary of State) by zip code for these three counties. The figure compares zip codes with more long–tenured businesses (“area with longest commercial property tenure”) to zip codes with fewer long–tenured businesses (“areas with shortest commercial property tenure”). If differences in property tax treatment were significantly discouraging new businesses, we would expect to see less business creation in zip codes with more established businesses. In two of the three counties we looked at (Los Angeles and San Mateo), the opposite was true. Similarly, as shown in Figure 11, in Los Angeles and San Mateo Counties there is little difference between the number of new employers in zip codes with longer–tenured businesses and zip codes with less–tenured businesses.

Property Taxes a Small Share of Profits for Many Businesses. It is unclear why higher property tax costs for new businesses relative to existing competitors do not appear to significantly discourage new business creation. One possible explanation is that property taxes represent a small share of many businesses’ profits. One study of state and local business taxes found that in 2014 the average California business paid less than 5 percent of their profits in property taxes. Another potential explanation is that many businesses lease their properties instead of owning them.

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NOTE: If you’d like more ammo to combat these attacks on Prop 13, check out my “Defense of Prop 13” fact sheet on my blog. I update it periodically with the latest data: